One of the main thrusts is to reduce substantially the numbers of P11D forms that are completed. Its recommendation is to allow employers to payroll on a monthly basis some or all of their benefits and expenses on a voluntary basis.
It is not the only change the OTS wants to achieve, but it believes it is a way of measuring the potential impact. It goes on to say that it thinks the proposed changes could eliminate 99 per cent of today’s P11Ds, saving vast amounts of time and effort for employers, agents and HMRC.
There is also a longer term recommendation to look at applying Class 1 National Insurance to all employee remuneration (whether cash or benefits in kind). The OTS is keen that its proposals dovetail with each other and thinks that this corresponds synergistically with the proposal to ease restrictions on the ability of employers to payroll benefits.
There is also a chapter (Chapter 6) devotes to the complex area of travel and subsistence. OTS says its preference would be to have a rule that says an employee can have only one permanent workplace, being the place where they spend the greatest part of their working time. But it recognises that costings for this route might be too expensive for the Exchequer.
Some of the recommendations are likely to be taken forward as part of the Budget 2014 process, whilst others are longer term issues to be taken forward in the next Parliament.
Summary
Chapter 1 – Voluntary payrolling of benefits
At the moment, all taxable benefits have to be reported by employers to HMRC after the end of the tax year via a P11d form. The recommendation is to introduce a legislative framework to permit employers to payroll some or all of their benefits and expenses on a voluntary basis.
Chapter 2 – Broadening PAYE Settlement Agreements
A PAYE Settlement Agreement (PSA) essentially allows an employer to make one annual payment to cover all the income tax and NICs due on employees’ taxable expenses or benefits which are minor or irregular. The recommendation is that the scope of PSAs should be widened to permit employers to settle any tax liability on benefits and expenses; and the administration be simplified.
Chapter 3 – An exemption for qualifying business expenses
Currently unless an employer goes through the process of applying for a P11D dispensation they have to report all expenses not covered by a specific exemption on the employee’s P11D, regardless of whether a deduction is available. The recommendation is that an exemption is added to the legislation for qualifying business expenses paid for or reimbursed by an employer.
Chapter 4 – Abolition of the £8,500 threshold
This threshold prevents employees earning below this annual rate from being taxed on certain benefits in kind. It also results in two different tax regimes, because employees earning below
the threshold require their benefits and expenses to be submitted on a P9D form, whereas for the vast majority a P11D form is used. The recommendation is that the £8,500 threshold should be abolished, and a further consultation on some mitigating steps.
Chapter 5 – Trivial benefits and other administrative burdens
There is no clear definition of what counts as 'trivial' and that there is inconsistent practices. The recommendation is redefining in law a short, easy to understand ‘principles based’ definition of a trivial benefit, incorporating a per item cap (e.g. £50).
Chapter 6 – Travel and subsistence
The Chapter which might be closest to the hearts and minds of some contractors.
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It recommends that a clearer definition of a permanent workplace is brought into the legislation. It says this its preference from a simplification point of view is to have a rule that says an employee can have only one permanent workplace, that being the place where they spend the greatest part of their working time. However, if costings show that this route would be too expensive for the Exchequer, it recommends a slightly different route of redefining 'permanent' and 'temporary' workplace by introducing a statutory percentage test, probably at 30 per cent.
At the moment, if an employer sends an employee on assignment to a different location (a temporary workplace), the deductibility of travel and subsistence expenses associated with temporary workplace depends on the intention at the start of the assignment rather than the actual final length. To provide more clarity and certainty, the OTS suggests permitting a deduction for the first 24 months regardless of the intended length of the assignment.
There is also a recommendation is to implement a specific code for homeworkers and a further recommendation is to remove the facility for employees to claim the cost of expenses in working from home not covered by employers e.g. telephone bills, internet, utility bills, but provide an uplifted homeworking allowance (to £10 a week for example).
Chapter 7 – Simplifying NICs – what more can be done?
One proposal is to explore further the case for applying Class 1 NICs to all employee remuneration (whether cash or benefits in kind).
Another proposal is the alignment of the underlying definitions of income and expenses. This means aligning the bases on which income tax and NICs are calculated, such that the basis for charging NICs should replicate as far as possible that for income tax. Where the rules are currently applied in the same way the NICs and income tax guidance should be consistent and ideally say the same.
Chapter 8 – A fundamental policy review?
The report concludes with the recommendation for a fundamental review of the Government policy on what is and what is not a taxable benefit, which should look at whether the way a benefit is provided should determine how much tax is paid on it, and whether a principle could be developed to enable items which should not be treated as taxable
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The report was given an enthusiastic welcome by The Chartered Institute of Taxation (CIOT) who said that its recommendations could drastically cut administrative burdens for employers, by making it much easier for them to process employee benefits and expenses. The taxation body urged the Government to 'jump' at the chance to cut administration around employee benefits.
Colin Ben-Nathan, Chairman of the CIOT’s Employment Taxes Sub-Committee, said: “We welcome this report. It contains many excellent recommendations which we believe should be given careful consideration by Government with a view to action as soon as possible. Employers are subject to a cumbersome system for the reporting of employee benefits and expenses and its streamlining should be regarded as a high priority. Certainly, with an aim of reducing P11Ds forms by 99 per cent the OTS cannot be accused of lacking ambition!
“We agree that making it easier for employers to process more benefits via the monthly payroll would substantially reduce the number of P11D forms that employers need to submit. P11Ds are an annual return of taxable benefits and expenses for each employee, and long viewed as a major burden on employers. Additionally, increasing the number of items that can be covered by a PAYE Settlement Agreement (PSA) would be of significant benefit to employers by enabling them to account for tax and national insurance direct with HMRC rather than having to process items separately for each employee.
“The report also recommends a specific code for home-working. We consider this is definitely the right approach when an increasing number of people are working from home. And an increased flat-rate home-working allowance would give greater certainty and less complication to those choosing this option.
“Finally, we are encouraged by the OTS proposal to end the situation where employers face two different tax reporting regimes for benefits and expenses, dependent on whether or not an employee’s earnings in a particular employment exceed the ‘£8,500 threshold’. This threshold was last increased in 1979 and was originally designed to distinguish those who were paying tax at higher rates from those who were not – it has indeed long passed its sell by date! That said, we echo the OTS in cautioning that there are outstanding issues to address with regards to benefits provided to low-paid workers, for example in the charity sector.
“Overall this OTS report contains many excellent recommendations to reduce the administrative burden all round for employers, employees and HMRC alike and we hope the Government will consider them carefully with a view to taking action as soon as possible.”
The Office of Tax Simplification’s publication, Review of employee benefits and expenses: second report, can be read here.
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Susie Hughes © Shout99 2014
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